It is very easy to focus on price when considering any type of product or service, including insurance. In insurance undercharging for a product or bad risk selection can cause insurers to run at a loss and then have to close or go into run off. When an insurer is placed in run off it causes issues for not just the insured but you the broker run a significant risk of losing the client.
Think going into run off doesn’t happen … well it happens more often than you might realise. In the last 5 years there have been 19 APRA authorised insurers placed into run off and a good chunk of those offered financial lines insurance. These 19 insurers going into run off doesn’t include the insurers that kept trading but stopped offering financial lines products. So if you think it won’t happen you are wrong.
So lets try and understand the go forward issues caused by an insurer placed into run off and then lets see if we can identify characteristics that indicate an insurer that might end up that way.
When an insurer goes into run off it does not renew the policies that it has coming up for renewal. It honours the risks that are currently active but doesn’t take on new business. So you will need to re-market the risk to try and find a new home. It is unlikely that the new insurer will offer better terms or conditions or a lower premium than the insurer that has closed. This means your insured will be paying a higher price for less cover. Doubt your client is going to be happy about that. Also you are going to have to tell your client that the insurer you chose for them has shut down (loss of trust in you as their broker ring a bell here). Again doubt your client is going to be very happy about that.
Oh but wait it can get worse … lets say your client had a claim with the insurer that is now in run off. What insurers tend to do once they are in run off is offload the liabilities represented by those active claims to another company that is a run off specialist. For example if all the active claims are worth $100m then the insurer in run off with pay another company $100m (or less) to take on that liability. The other company thinks it can settle the claims at a lower price than the run off insurer has reserved for the claims (ie less than $100m). So the run off specialist takes the $100m in claims and is paid $100m by the insurer. The run off specialist is now only focused on one thing and that is settling these claims for less. They don’t prioritise reputation the way a go forward insurer does and thus they might decide to deny indemnity or be difficult towards the insured’s client when settling a claim. So even if you have kept the client through the remarketing exercise they are now annoyed at you because of the claims handling.
Oh and you have just spent an extra few days arguing with the run off insurer when you could have been out winning new business. Hmm maybe not such a good decision to take the cheap option was it.
What happened here? You thought you were doing your client a favour by recommending the cheapest terms, the insurer went into run off and the client left you to move to a broker who didn’t recommend the cheapest terms. Hmmm …. Oh and by the way that other broker earns more commission for recommending the higher premium … double whammy.
So what are some signs or red flags that we can look for when identifying an underwriter that might be more at risk of going into run off?
Lack of risk selection is the first. If they offer a solution for every risk you send them and don’t often if ever say no then you know they aren’t applying a selection process to their insureds. They aren’t building a portfolio of good clients that will run profitably for them. If they are accepting all comers then the bad risks will have claims, their premiums will rise and then good risks will pay more … until another broker attacks and offers your client a cheaper premium with an insurer (like FTA) who has built a book of profitable business. Then you lose your client.
Another red flag is if the underwriters lack expertise or come from another insurer that has closed down. Choosing your underwriter is a bit like betting on horses ….. do you chose the horse that has been unsuccessful in it last few starts (ie had to move jobs) or do you chose the horse that has been successful. We will all choose the successful underwriter. If you choose an underwriter who has been unsuccessful previously it is more likely they will be unsuccessful again and then you will be remarking your client or losing them when they find another broker
Other red flags include insurers after market share. Sometimes this is shown in insurers doing book rolls for increased commission to their broker. This shows that the insurer is mainly focused on increasing their total premium and not on building a profitable portfolio. Once the insurer has reached the desired total premium they will start to non renew business they deem higher hazard or if the claims have caught up to them they will go into run off. Either way you have an unhappy client that will seek terms from an alternative broker.
FTA’s principals are extremely knowledgeable about financial lines and have been very successful over the many years they have been in the market. This is reflected in the FTA are one of the few Lloyd’s Coverholders to have been offered a 3 year capacity contract by Lloyd’s.
FTA are a safe haven for your clients as they will join a portfolio of other low hazard clients and together they will all be rewarded over the longer term with lower premium, not having to be re-marketed and having their claims paid quickly and smoothly.
What this means for you their broker is more time to win new business and you can charge higher fees! This is a double win for the broker!